Fiducia Market Commentary
Despite events in 2011 stock markets ended the year with mixed fortunes. In the US the S&P 500 was up 0.74%, in the UK the FTSE 100 was down 5.55% and unsurprisingly the DJ Euro Stoxx Index performed worst, down just over 18%. In the ‘risk off’ environment that has prevailed over the past twelve months, fixed interest funds standout as the top performers, with the largest gains posted by Index Linked Bonds. Persistently high inflation added to Index Linked returns in 2011, however falling inflation since the start of 2012 has reversed this trend; conventional bonds have also dipped since the beginning of the year. In contrast, global equities have had the strongest first quarter performance for 14 years boosted by improved corporate earnings, monetary easing and a sustained economic recovery in the US. The OECD predicts US growth of 2.9% for the first quarter as a consequence of improving consumer confidence and rising credit growth combined with falling unemployment, while the UK and Europe are expected to contract by 0.4%. Unemployment continues to rise in Europe and credit remains tight. The recent rally has largely been driven by technology stocks and financials, while miners have suffered due in part to slower growth in emerging economies, particularly China. Amongst other assets, commercial property continues to rise albeit at a slower pace with most returns attributable to income. Absolute Return funds have struggled to keep pace with Bonds over the year but on the whole have delivered returns in excess of cash, thus preserving capital values in what has been a challenging year. Property and absolute return funds are likely to remain our two key diversifiers within low risk assets as correlations remain low.
Notwithstanding a strong start to the year for risk assets, most notably global and emerging equities, we maintain our cautious stance for the coming months. While reported corporate earnings for the first quarter were strong we believe there are likely to be downgrades to come, most notably in Europe but less so in the US. We are conscious that the latest rally may not be sustainable, as it is largely being driven by Quantitative Easing, with the ECB’s Long Term Refinancing Operation (LTRO) a key catalyst acting to free up funding in financial markets. We also maintain one eye on oil prices as further increases in our view would threaten to stave off growth, although the potential release of emergency reserves should relieve some price pressure. Our cautious approach is also supported by the lack of a definitive solution to the Euro crisis, however should this change it would certainly indicate a turning point for markets. The move by France and Germany to create fiscal union is significant and, as a consequence, should pave the way for the ECB to assist Italy and Spain in particular. While cautious in our view, we still prefer equity funds focused on quality dividend paying companies to bonds, which we believe offer very little value as a consequence of QE and forced purchases by banks. We are most positive on prospects for emerging equity where weightings have increased, due to attractive valuations, lower debt burdens than the Western regions and greater scope for governments to ease monetary policy. Across all asset classes we are aware that correlations have been increasing and as such we will look to add to cash within the portfolios to improve overall diversification, but expect this to be a short term measure. Our stance on Absolute Return funds remains positive albeit with increasing focus on strategies that have lower correlations to traditional asset classes, thus providing even greater diversification benefits. The asset protection mode of our portfolios which has proved effective throughout a very challenging year is set to continue.